At last report, negotiations between congressional leaders and President Obama had failed to result in a budget agreement, meaning the threat of a government shutdown looms closer than ever. Rather, it’s as close as it’s come since the government actually did shut down in 1995, and then again in 1996. Should the struggle over the budget fail to reach resolution in talks scheduled for later this evening, the government will go on hiatus tomorrow, prompting investors to wonder what this means for the economy. The short answer is that, it’s impossible to say. There are a number of variables, most notably the length of the shutdown, that will influence the economic impact it will have. The more specific explanation is that an investigation of the 1995 and ’96 shutdowns, the only existing reference points, may be the best indicator of where the market is headed provided DC powers off tomorrow.
Last time the government shut down, the market actually pushed higher, though only marginally. Granted, this was during the Clinton administration when the economy was significantly more secure than what we’re looking at today. Before and after the shutdown in the nineties, the market was experiencing a rally. This time, a recovery is still in progress and consumer confidence is weak. Still some of the trends observed then may be worthy of looking at, particularly the declines across the tech sector.
Semiconductors, tech equipment, software, health care equipment and healthcare services all took a hit during the last shut down. Given the recent volatility of the sector, with companies making huge gains only to fall the next day and a number of mergers and acquisitions in progress (Texas Instruments (NYSE: TXN) and National Semiconductor (NYSE: NSM)) a similar outcome seems likely.
Among the sectors, semi-conductors seem especially at risk. The second earthquake that struck Japan today, the largest global consumer of chips, is likely to continue to be deleterious to the industry and the nation’s economy in general. The natural disasters in Japan will force the nation to concentrate on rebuilding efforts in coming months, negatively affecting semi-conductors for the remainder of the year. This, coupled with the anxiety over the shutdown, has the potential to sway investors away from shares in semi-conductor companies.
Even still, research from Bespoke analysts featured on Barron's today indicates the threat applied to tech sectors across the board.
“The fact that all three Technology groups were weak during the shutdowns (in 95 and 96) is notable, and investors should prepare for continued weakness in this sector in case there is any prolonged shutdown,” they warned.
Other companies that will be at risk are those that are heavily reliant on the government for revenue according to the group’s co-founder, Paul Hickey, in an interview with CNBC today. Among the tech companies he mentions is SRA International, Inc. (NYSE: SRA), a provider of technology and consulting services and solutions primarily to government organizations.
SRA is one of many corporations that are at risk as a result of their reliance on the government for funding and revenue. Hickey maintains that, though the shutdown is likely to have an immediate impact on all of these companies, the biggest risk for SRA and the others will come later, after the shutdown, when cuts are made across the board.
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